ATSG reports second quarter results

Air Transport Services Group, Inc. reported a 40 percent increase in second quarter revenues, and a loss for the quarter, principally due to certain unreimbursed overhead expenses as a result of the recent arbitration ruling.
ATSG’s revenues were USD 394.9 million for the second quarter of 2008, compared with USD 281.3 million in the second quarter of 2007, an increase of USD 113.6 million.

Second-quarter DHL revenues from expenses subject to markup decreased 11 percent, as ABX Air operated fewer aircraft and managed fewer facilities for DHL than a year ago.
As previously reported, arbitrators ruled that ABX Air’s general overhead expense, excluding certain corporate costs, should be reimbursed in full with mark-up by DHL through the end of 2007 per the commercial agreements, but reimbursed only in part based on a negotiated allocation formula starting in 2008. Air Transport Services Group, Inc. reported a 40 percent increase in second quarter revenues, and a loss for the quarter, principally due to certain unreimbursed overhead expenses as a result of the recent arbitration ruling.
ATSG’s revenues were USD 394.9 million for the second quarter of 2008, compared with USD 281.3 million in the second quarter of 2007, an increase of USD 113.6 million. Revenues from the businesses of Cargo Holdings International Inc. (CHI), which were acquired at the end of 2007, were the principal source of second quarter revenue growth. They contributed USD 89 million, or 78 percent of that growth, compared with USD 75.4 million, or 80 percent of the year-over-year increase in ATSG’s first-quarter revenues.
ABX Air’s revenues from its commercial agreements with DHL increased 8 percent, including revenues from fuel and other costs reimbursed without markup. Second-quarter DHL revenues from expenses subject to markup decreased 11 percent, as ABX Air operated fewer aircraft and managed fewer facilities for DHL than a year ago.
ATSG operated at slightly below breakeven for the quarter, with a net loss of USD 526,000, or USD 0.01 per common share, for the quarter ended June 30, 2008. That compares with net income of USD 4.5 million, or USD 0.08 per share, for the second quarter of 2007. The loss stemmed in part from the effect of an otherwise favorable arbitration ruling in July, which held that ABX Air was not entitled to reimbursement from DHL for USD 2.5 million in non-recurring expenses related to Board review a year ago of an indication of interest from ASTAR Air Cargo Holdings, LLC, and that general overhead expenses previously reimbursed in full by DHL became subject to allocation effective January 1, 2008.
As previously reported, arbitrators ruled that ABX Air’s general overhead expense, excluding certain corporate costs, should be reimbursed in full with mark-up by DHL through the end of 2007 per the commercial agreements, but reimbursed only in part based on a negotiated allocation formula starting in 2008.
Accordingly, results for the second quarter included USD 2.5 million in non-recurring corporate expense incurred for evaluation in 2007 of the ASTAR indication of interest, and USD 1.6 million in recurring allocated general overhead expenses for the first half of 2008. In addition, DHL is now disputing its obligation to reimburse ABX Air for USD 2.2 million in legal expenses arising from the arbitration. While ATSG management believes these expenses are reimbursable under the ACMI and Hub Services agreements, it has chosen to forego recognizing them in revenues pending the resolution of this matter.
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) increased 38 percent to USD 31.0 million in the second quarter, compared with USD 22.4 million in the year-earlier period (see Reconciliation of EBITDA to GAAP Net Earnings at the end of this release). EBITDA is a non-GAAP measure of financial performance that management believes better reflects the cash-generating performance of asset-intensive, financially leveraged businesses such as ATSG.
Net earnings for the second quarter of each year included deferred (non-cash) income tax expense. ATSG expects to record deferred income tax expense in 2008 at approximately 41 percent of pre-tax earnings.
For the first six months of 2008, revenues increased 36 percent to USD 776.9 million, and net income decreased 63 percent to USD 3.3 million, or USD 0.05 per share, compared with the first half of 2007. Revenues from ABX Air’s commercial agreements with DHL increased 6 percent for the first half of 2008, but were down 10 percent excluding revenues primarily from reimbursed fuel expenses. Each of ATSG’s operating segments was profitable in the first half of 2008.
DHL Segment
ABX Air’s commercial agreements with DHL consist of an Aircraft, Crew, Maintenance and Insurance (ACMI) Agreement and a Hub Services Agreement. Under each agreement, ABX Air earns a base mark-up of 1.75 percent on eligible costs and can earn incremental mark-ups for meeting certain quarterly cost-related goals as well as other annual cost-related and service goals. Any earnings from attainment of annual cost-related and service-related goals are recognized in the fourth quarter.
ABX Air’s pre-tax earnings from its two commercial agreements with DHL decreased 68 percent to USD 1.1 million from USD 3.4 million during the second quarter of 2007. Base markup revenues were 10 percent lower, as DHL removed seven ABX Air aircraft from service since the second quarter of 2007 and assumed management of two regional hubs and a logistics center. Incremental mark-up revenues were USD 684,000, up 40 percent from the second quarter of 2007, driven by continued solid performance against cost-related goals in ACMI operations.
Non-DHL Segments and Other Activities
All of ATSG’s businesses not included in the DHL segment recorded year-over-year second-quarter revenue growth and were profitable as a whole.
“I expect continued improvement in these businesses as the year unfolds,” Hete said, “as we fulfill commitments to both dry lease customers and ACMI customers eager to deploy our Boeing 757 and 767 aircraft. Our ACMI and CAM businesses allow us to offer greater service flexibility for our customers and diversify into higher margin businesses, while protecting us from the effects of volatile fuel prices. These businesses, as well as our maintenance and postal operations represent the future of ATSG, and we are focusing more of our attention on finding new ways to help them achieve profitable growth.”
ACMI Services Segment
The ACMI Services segment includes results of ACMI and air charter services, including ABX Air services provided outside its principal commercial agreements with DHL. Revenues for that segment increased to USD 106.7 million in the second quarter, including reimbursable expenses (principally fuel costs) of USD 38.6 million, compared with USD 14.2 million for the second quarter the prior year.
The ACMI segment reported a pre-tax loss of USD 773,000, down from a pre-tax profit of USD 2.2 million in the second quarter of 2007. Principal factors include startup costs of USD 1.1 million, excluding inter-company lease charges of USD 1.4 million from CAM, for the certification and deployment of Boeing 767 and 757 aircraft into the fleets of Air Transport International LLC (ATI) and Capital Cargo International Airlines, Inc. (CCIA), along with higher aircraft maintenance expenses, certain unreimbursed fuel expenses to position ATI aircraft for their military business, and higher crew costs.
CAM
Second-quarter results from Cargo Aircraft Management Inc. (CAM), ATSG’s aircraft leasing segment, included revenues of USD 11.6 million, and segment earnings of USD 4.8 million during the second quarter. CAM recently began serving outside customers with the delivery of the first of two Boeing 767s to CargoJet. However, during the second quarter all of its revenues were derived from leasing aircraft to airline subsidiaries of the Company, and therefore eliminated in consolidated results. Earnings, however, reflect the margin between fair-market lease rates charged to its affiliated airline companies and aircraft carrying costs, including an allocation of interest expense based on prevailing rates and the value of its aircraft assets.
Other Business Activities
Other Activities revenues increased 14 percent to USD 9.4 million in the second quarter of 2008 compared to USD 8.3 million in the second quarter of 2007, driven by growth in aircraft maintenance services and parts sales. In 2008, margins in these businesses were affected by higher non-reimbursed corporate expenses, including expenses related to the CHI acquisition, partly offset by improved margins from sorting-center management for the U.S. Postal Service.
Selected Items
DHL Restructuring Plan
On May 28, DHL announced a plan to restructure its U.S. operations in an effort to improve its financial performance. Principal features of the plan include further reductions this year in the number of ABX Air aircraft performing services for DHL, and DHL’s intention to replace ABX Air with United Parcel Service (UPS) as its principal provider of airlift and sorting services in the United States.
In June, DHL formally notified ABX Air of the release during the second half of 2008 of 23 of ABX Air’s 55 DC-9 aircraft serving DHL, with the remainder to be removed from service by the end of the second quarter of 2009. The ACMI agreement between ABX Air and DHL includes a put provision that gives ABX Air the option to retain or to sell back to DHL those aircraft removed from the DHL network during the term, at the lower of book or fair market value. ABX Air presently expects to sell nearly all of its DC-9 aircraft to DHL as they are removed from DHL service. All 55 of the DC-9 aircraft in DHL service during the second quarter have a current net book value of approximately USD 19 million. The net book value of the 23 DC-9 aircraft that DHL intends to remove during 2008 is approximately USD 6.6 million. On July 18, 2008, ABX notified DHL that it had elected to sell 22 of the 23 DC-9 aircraft in accordance with its contractual put right for a total of USD 5.8 million. On August 1, 2008, DHL notified ABX of its acceptance of this sale. ATSG currently estimates that the removal of 23 DC-9s from DHL service, starting in the third quarter, will reduce ABX’s annualized cash flows and revenues from reimbursed depreciation expense by approximately USD 3.0 million.